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Thayer Partners Blog

3 Key Things to Include in Your Retirement Portfolio

[fa icon="calendar"] Sep 16, 2015 10:00:00 AM / by Chris Wilmerding

Chris Wilmerding

nest_egg_retirement_planMaking the transition to retirement is a huge life step for anyone. For many, making the adjustment to retirement can be difficult, as they shift from being a busy worker to enjoying a much-deserved rest from the daily grind.

In fact, many people have anxieties about their retirement, wondering if they’ll end up running out of money in retirement. They worry about their 401k, IRA, and other key retirement savings accounts.

Sadly, the risk of running out of money in retirement is all too real. Lifespans are increasing, meaning that retirees are having to stretch out their retirement savings further than previous generations.

While there’s no way to 100% guarantee that you won’t run out of money in retirement, there are steps you can take to minimize your risk, such as making sure that you include the following in your retirement portfolio:

Diversified Investments

There’s an old saying that applies pretty strongly to retirement investments: Don’t put all of your eggs in one basket.

The goal when saving for retirement is making sure that there’s a steady income source available to you when you retire. Diversifying your investments is a key part of meeting that goal.

Why diversify? Well, the honest truth is that no matter how stable or profitable a given stock might be, there’s always a risk that the company attached to that stock will implode, drastically shrinking the value of the stock. Even so-called “blue chip” stocks aren’t immune to large losses in their value.

If you have all or most of your investment capital in a single stock (or your company’s stock or options), and that stock goes belly up, then you’ll be losing a significant portion of the money you’ve invested. Unless you have a crystal ball that can predict stock behaviors with 100% accuracy in the long term, it’s probably best not to gamble your entire retirement portfolio on any one stock.

Diversifying investments helps reduce your risk of losing your shirt, and one of your key retirement income streams.

Low-Cost Index Funds

Now that we’ve addressed the issue of diversification, what are some of the types of funds that you should include in your retirement portfolio?

Since your goal in retirement is most likely to make sure that you have a steady source of income rather than trying to maximize revenue, low-cost index funds are a great option for investing during retirement because they are remarkably reliable at delivering the performance of the market (up or down) when compared to their more expensive, actively-managed counterparts. As stated in a marketwatch.com article: “during the two bull periods, the index outperformed 80% and 63% of its peers” in reference to the S&P 500 compared to actively-managed funds.

The fees on these passive funds also tend to be much lower than their actively-managed counterparts, keeping costs down.

Bonds and other investments that deliver steady income

Stocks aren’t the only kind of investments that you can make for your retirement. Another option is to buy bonds in companies or in government entities.

What’s a bond, and how does it differ from a stock?

In essence, when you “buy” a bond, you become an investor making a loan to a company or other legal entity. Unlike a stock purchase, you get a fixed rate of return on your investment rather than one that changes based on the company’s actual performance. The return, or “coupon rate,” is a percentage of the bond’s original offering price.

When issued, a bond is set for a specific period of time, at the end which the original investment is fully paid back and the bond is now “matured.”

Russell.com does a pretty good job of summarizing what a bond is by saying that “a bondholder, in effect, holds an IOU.” Like a personal IOU, the time allotted for repayment and the ability of the borrower to repay are two very critical aspects for a personal bond.

With any bond, there is a risk that the original investment will not be repaid in full or will be repaid late.

However, many advisors recommend having bonds as a part of your retirement portfolio because they’re a generally stable, reliable source of income. As pointed out by Investopedia, “by owning bonds, retirees are able to predict with a greater degree of certainty how much income they’ll have in their golden years.”

The same may be said of immediate annuities and deferred income annuities. While not for everyone, these are two insurance company products that are designed to deliver steady income just like a bond.  An immediate annuity will usually deliver a high income stream for life (when compared to a bond). The catch is that your estate loses the principal of your investment.  A deferred income annuity is a product where you may invest $100,000 and decide to turn on the income in, say, 10 years when you retire.  Like an immediate annuity, you will receive an income stream for life, but unlike an immediate annuity, you can include a small life insurance policy to replace the principal when you die.

The point is you want to have a handful of income sources to replace your income in retirement, usually a mix of guaranteed income and variable income (subject to the stock and bond market).  For example, social security, distributions from your IRA/401K, dividends and interest from your taxable portfolio, income from a deferred income annuity etc.

Slow and Steady Wins the Race, Especially When You’re Close to Retirement

When you’re younger and have decades before you approach retirement, high-risk, high-reward investment strategies might make sense, since you’ll have time to make up any losses. However, as you get closer to the transition to retirement, the emphasis for your investments should probably shift from growing funds to making sure that you have a stable source of income to fund your post-retirement lifestyle.

Now, you’ll still want some higher-interest funds in your stocks to help your portfolio beat inflation. Why? Because, being too conservative when you retire is equally dangerous. With a 100% bond portfolio, inflation could potentially kill your purchasing power.

Also, unlike your grandparent’s day when one could simply buy bonds (that had a real interest rate then, btw) and probably die within 5 to 10 years of retirement, for a healthy 65 year old couple, statistics from the Society of Actuaries cited by Forbes now show there is a 45% chance that one member of the married couple will be in the early 90s before they die!  So you likely need to make your retirement savings accounts last 20 years or more.

Keeping some of the above in mind when investing for your retirement can help you keep your hard-earned nest egg intact so that you can retire comfortably. However, there’s more to your retirement income than just your investment portfolio.

Beyond your investments, you might want to find ways to optimize your Social Security income, as that will be a significant part of your post-retirement income.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10-percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Corporate bonds contain elements of both interest rate risk and credit risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the mutual fund, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 Avoid Running Out Of Money At Retirement

Topics: IRA, Retirement, 401k, Social Security

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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